Serra Ventures on why investors will continue to be drawn to the rewards of agri-tech

Tim Hoerr has spent a lifetime in the American Midwest, starting biotech firms at the University of Illinois, working as a management consultant, and in between, as he is now, gazing out over Lake Michigan’s wide-open sandy beaches and glistening waters.

Even Serra Ventures, the US-based venture capital firm that Hoerr founded in 2008, is firmly grounded in the region. Hoerr started Serra to support innovation in the Midwest after recognising that despite local universities regularly inventing “world changing technologies”, there was a lack of opportunity for bringing them to market.

With his background in consultancy, Hoerr started offering his services to tech companies spun out of the University of Illinois, although after joining up with venture capitalist Dennis Beard, the two quickly combined their strengths to bring investment and consultancy under a single venture.

“All of Serra’s consulting clients loved our consultancy work but ultimately, it came down to how they were going to raise capital to get their commercialisation plan moving forward,” says Hoerr.

“So, we formed our first fund in 2010, really more out of practical necessity to serve those early-stage companies.”

The company’s first three funds included ten agtech deals, although when the decision was made to create a fourth that was sector-specific, agtech was the obvious choice given the sector’s superior performance in previous funds.

“It's also a massive opportunity with a massive problem set. I can't think of any more meaningful work to be involved in,” Hoerr adds.

Is this the most challenging time for agtech?​

Serra’s early focus on the Midwest has now drifted towards a geographical agnosticism that prioritises a philosophy of change. “It’s really about what type of problem are they solving,” Hoerr explains. “Do they have a novel, disruptive solution that can potentially be a category leader?”

Serra’s funds are still dominated by the US, however, with its Serra Capital Ag Tech Fund – launched in 2021 and raised almost $50m – containing just two deals from Canada and one from Argentina.

Its second agtech fund which is currently raising capital has earmarked up to 25% for non-US investments, expecting this to come from South America, Europe, Canada, Israel, Mexico. Hoerr is aiming to raise $100m although this is unlikely to be concluded before the end of the year. “The climate for raising venture money is certainly the most challenging in my 15 years in the business. That means a longer raise period.”

Serra typically uses seed rounds and series A as an initial point of entry, meaning it looks for companies with about $500k in annual revenue. That means it is usually writing an initial cheque for between $500k and $2m, although having made a commitment, it will set aside 1-1.5x that amount for future rounds.

With a focus on helping farmers reducing their impact on the planet, Serra has three key criteria when it comes to picking deals: sustainable farming, healthy climate, and digital agriculture, although Hoerr recognises there is often little to distinguish between the first two in particular.

EarthOptics, for example, is one investment that straddles both. The company is a soil data and mapping company, used by large farming organisations or food processors to model soil composition soil health. “We would consider it more of a sustainable agriculture because it's helping farmers use less chemicals, but that’s clearly a company that's also contributing to a healthier climate.”

A big piece of Serra’s due diligence is engaging with the customers of a prospective portfolio company to determine how it is being used. “We ask questions like: ‘is this solving a problem that can't be solved otherwise? Are there other solutions? Is it merely an academic ‘nice to have’ or are customers actually implementing it to solve a particular pain point? How do you see this ultimately impacting not only your bottom line, but your impact on the environment and the climate?” says Hoerr.

VCs starting to look beyond the 10-year cycle​

Unsurprisingly, Serra also plays close attention to the financials and targets a 3.5-4x net multiple on invested capital net over the lifetime of the fund. At the moment, Serra’s funds are structured as ‘ten and two’, meaning they have a 10-year life with two subsequent one-year extensions that can occur without investor sign-off.

While such a structure is common in venture capital, this lifespan can raise challenges in agri-tech where change and development is often slower due to annual crop cycles, Hoerr says.

“We need to be more patient in the ag and food category and that might ultimately require us to use a timeline that that is not the traditional 10-years,” he suggests. “Ag is a sector that is going to take, generally speaking, a longer period of time to produce the financial results that investors want to see.”

While this outlook is now becoming more common among the general partners who manage agri-tech funds, Hoerr says the limited partners who provide the capital are usually less in tune with the argument that more time is needed. “They already feel stretched with an illiquid 10- or 12-year vehicle.”

Nonetheless, Hoerr has no doubt investors will continue to be drawn to the rewards agri-tech can offer. “You're seeing the problems that come from farming, climate. You're seeing population growth, yet we must all eat while still preserving the planet for tomorrow. So we step back from that and say, is there a better category to be in than food and ag? I don't think so."